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I understand the principal of 'negative interest rates'; ie. if your interest rate is -ve, it incentivizes banks to move money into the economy rather than just

I understand the principal of 'negative interest rates'; ie. if your interest rate is -ve, it incentivizes banks to move money into the economy rather than just holding on to it. However, I keep reading this in articles: "Although retail banks have yet to pass on that negative to rate to Swedish consumers". What does that actually mean? Why are the banks affected at all by what the government determines the interest rate to be? What is this charge they would be 'passing the charge on to consumers'? It's not like the total amount of money in the bank mysteriously grows or shrinks based on the government stipulated interest rate every year, and I've certainly seen many places where banks refused to pass on interest rate changes to consumers in general. Is this just the rate applied to treasury bonds? Or some kind of tax related thing?

dragonwriter 11y ago
> Why are the banks affected at all by what the government determines the interest rate to be? What is this charge they would be 'passing the charge on to consumers'? The interest rates set by central banks are the (targets for) rates that regular banks pay (and receive) for interbank loans, and therefore represents the marginal costs that banks avoid by additional customer deposits. So, it makes sense for what banks are willing to pay customers for money to be influenced by what they would have to pay to replace that money via interbank loan. > Is this the rate applied to treasury bonds? Treasury yields are controlled by different mechanisms.
- shadowmint 11y ago
  > are the (targets for) rates that regular banks pay ...surely, though, this means that it's only relevant if a broad number of banks decide to adopt the 'official' interest rate. Unless there's some legal penalty to doing so, I don't understand why the swiss banks are simply refusing to adopt the -ve rate.
  - dragonwriter 11y ago
    > ...surely, though, this means that it's only relevant if a broad number of banks decide to adopt the 'official' interest rate. Central banks are often either governed in substantial part by member banks who are also the largest banks in the economy (as is the case with the US Federal Reserve) and/or have influence that can be used to align practical interbank lending rates with the target rates (if they didn't, rate setting would be immaterial), such as the ability to issue banknotes and lend them themselves at the target rate.
- alister 11y ago
  > the rates that regular banks pay (and receive) for interbank loans Something still doesn't make sense. If bank A borrows $100 from bank B at 1% (positive) interest, then A has to pay back $101 to B. If bank A borrows $100 from bank B at -1% (negative) interest, then A has to pay back $99 to B. In the latter case, A would try to borrow as much as possible, and B would try to never lend anything. What am I missing here?

dragonwriter 11y ago

> Why are the banks affected at all by what the government determines the interest rate to be? What is this charge they would be 'passing the charge on to consumers'? The interest rates set by central banks are the (targets for) rates that regular banks pay (and receive) for interbank loans, and therefore represents the marginal costs that banks avoid by additional customer deposits. So, it makes sense for what banks are willing to pay customers for money to be influenced by what they would have to pay to replace that money via interbank loan. > Is this the rate applied to treasury bonds? Treasury yields are controlled by different mechanisms.

shadowmint 11y ago
> are the (targets for) rates that regular banks pay ...surely, though, this means that it's only relevant if a broad number of banks decide to adopt the 'official' interest rate. Unless there's some legal penalty to doing so, I don't understand why the swiss banks are simply refusing to adopt the -ve rate.
- dragonwriter 11y ago
  > ...surely, though, this means that it's only relevant if a broad number of banks decide to adopt the 'official' interest rate. Central banks are often either governed in substantial part by member banks who are also the largest banks in the economy (as is the case with the US Federal Reserve) and/or have influence that can be used to align practical interbank lending rates with the target rates (if they didn't, rate setting would be immaterial), such as the ability to issue banknotes and lend them themselves at the target rate.
alister 11y ago
> the rates that regular banks pay (and receive) for interbank loans Something still doesn't make sense. If bank A borrows $100 from bank B at 1% (positive) interest, then A has to pay back $101 to B. If bank A borrows $100 from bank B at -1% (negative) interest, then A has to pay back $99 to B. In the latter case, A would try to borrow as much as possible, and B would try to never lend anything. What am I missing here?